Submission to the Inquiry into
The Structure and Distributive Effects of the Australian Taxation System.

Cameron Tampion
July 2003

Introduction

The author welcomes the opportunity to contribute this submission to the Inquiry into the Structure and Distributive Effects of the Australian Taxation System.

As the terms of reference of this inquiry suggest, the structure of the tax system is a major influence upon the welfare of society as a whole.  Although not explicitly mentioned in the terms of reference, the quality of the natural environment is both fundamental to welfare and significantly impacted by tax policies.  As such, no inquiry into the distributional effects of the Australian Taxation System should ignore the impact of tax policies and reform upon the environment, and how the dual goals of ecological sustainability and social equity can be achieved in tandem.

In this context, the consideration of environmental impacts can be shown to be relevant to the inquiry's terms of references:

1)	It is difficult to think of many issues more central to intergenerational equity than sustainability.
•	For example, the future viability of many rural economies (where incomes are frequently lower than the national average) may be impaired by environmental issues such as dryland salinity, climate change and poor water quality.

2)	Lower income groups are frequently impacted to a greater extend by poor environmental conditions
•	For example, children from poorer households tend to have higher levels of lead in their blood than higher income households

3)	A "double dividend" from ecological tax reform may provide both improved environmental outcomes as well as superior long-term economic and welfare performance through recycling environment taxes into reform of other business and personal taxes.
•	For example, a tax on pollution could be used to fund a reduction in payroll tax.

Current level, extent and distribution of tax burden on individuals and businesses

Whilst supportive of the principle of progressive taxation and a broad revenue base, this submission does not seek to comment directly upon issues such as personal income tax rates and thresholds (and the indexation thereof), superannuation guarantee requirements or surcharges, or corporate tax rates.

In effect, this submission proposes means of funding the inevitable calls for reduced levels of taxation upon individuals and businesses that the author assumes the inquiry will receive in other submissions.

Central to the concept of ecological tax reform is the removal of direct financial subsidies to unsustainable activities and the internalisation of environmental costs (currently not borne by those exploiting natural resources) through the imposition or raising of taxes on the use, depletion or degradation of our nation's natural capital.

Economists believe that this approach to reducing harmful activities is more efficient than "command and control" approaches that specify compliance requirements (eg maximum emission levels) for each firm and/or the methods to achieve compliance.  Ecological tax reform can provide price signals to the market as a whole that enables the most efficient methods of hazard reduction to be found and for the actions to be taken by the firms for whom the actions are most economical, thus minimising the cost of compliance on the economy as a whole.

The additional revenues raised by these green tax measures can either be used to provide incentives for environmentally beneficial activities and/or "recycled" through a commensurate reduction in other distortionary taxes on labour and capital (eg payroll or income taxes).

Whilst the precise magnitude of financial subsidies and environmental externalities is difficult to quantify, it undoubtedly runs into many thousands of millions of dollars and is comparable to the levels of revenue raised by other classes of taxes.

One study on behalf of the Commonwealth Department of the Environment, Sport and Territories published in 1994 proposed the following range of amounts:
	Financial subsidies		  5.732 billion
	Environmental subsidies	  7.746 (low)		    8.866 (high)
	Total				13.478 billion		$14.598 billion

Adjusting the dollar amounts in this range for eight years of inflation suggests that the fiscal benefit of removing financial and environmental subsidies could be somewhere between $16.678 and $18.064 billion.

Whilst this submission stops short of identifying which taxes should be cut and by how much, comparing this range to other classes of tax revenue shows the magnitude of cuts that could be made to other taxes on individuals and businesses if financial and environmental subsidies to natural resource use are eliminated:

Table 1: Revenue of various existing and potential classes of tax
Tax class	Revenue 01/02
$ '000,000,000	
Income taxes on individuals	87.250	
Income taxes on enterprises	31.782	
Excises & levies	20.265	
Removing subsidies on resource use (high)	18.064	
Removing subsidies on resource use (low)	16.678	
Taxes on financial & capital transactions	9.684	
Taxes on immovable property	9.507	
Payroll tax	9.415	
Taxes on insurance	2.386	

It is worth noting that some taxes in table 1 are levied by tiers of government other than the Commonwealth.  Whilst the Commonwealth collects the vast majority of tax revenues in Australia, the economic and environmental effects of taxation do not recognise constitutional boundaries or state borders.  Hence this inquiry must, of necessity, consider the total tax take of all tiers of government.

Long term impact

Sustainability is, by definition, a long term issue with massive intergenerational consequences.  The author makes the assumption that this assertion requires no further elaboration.

The structure of the tax system, however, does not just affect our behaviour today.  It can also commit us to unsustainable practices well into the future with substantial implications for intergenerational and intragenerational equity.

For example, major infrastructure projects are planned with operational and financial time horizons stretching into decades.  The decision making process for such projects will incorporate current and expected tax rates, depreciation and capital allowances, and levies and royalties payable to governments and statutory bodies at all levels.  These decisions that are being made today will determine, for example, the installed capacity of various types of electricity generation plants, the distribution of roads and public transport infrastructure, and the extent of urban sprawl well into the future.

To ensure that in future there is sufficient installed capacity for everyone to use green power, that certain groups are not excluded by inadequate public transport infrastructure in their area, and the productive resource base of rural economies is not degraded, policy direction is needed now.  This direction can be achieved by establishing a clear ecological tax reform agenda.

Roles of the Commonwealth and the States

Whilst the Commonwealth collects around 80% of Australia's taxation revenue, the States collect significant sums and many taxes and charges at the state level can be directly linked to the likes of natural resource management.  Furthermore, the States retain constitutional responsibility for a range of key environmental issues and cannot be excluded from any discussion of ecological tax reform.

As previously mentioned, in general this submission does not seek to comment directly upon the existing range and level of taxes.  However, it does appear that the States may be best placed to administer many of the taxes that could arise from a ecological tax reform initiative, and many of the taxes commonly flagged for abolition under such reforms (such as payroll tax) are currently levied at the state level.

Such implications for Commonwealth-State relations are beyond the scope of this submission, however they are worthy of further discussion in a more directly related forum.

Impact

The primary focus of this inquiry is upon distributional effects and equity.  As discussed above, imposition of environmental taxes can provide, for example:
a)	additional funds for environmental, welfare or employment programmes, and/or
b)	sufficient revenue to reduce or abolish certain other types of tax on individuals and/or businesses

If we are to ignore the intergenerational consequences of sustainability, the environmental impacts of ecological tax reform may be outside the scope of this inquiry.  There is, however, evidence that where such taxes have been recycled into cuts in other business taxes, there is at worst a neutral effect on competitiveness and employment.  Some economic modelling puts the impact on the Australian economy of imposing Kyoto Protocol-level limits on Greenhouse emissions at around the magnitide of statistical discrepancy in the national accounts (0.7%), and less than the cost to the Australian economy of the drought in 2002/03.  Without action on Greenhouse emissions, such droughts are likely to become more frequent and more severe with devastating implications for regional Australia where incomes already tend to be lower than the national average.

On the other hand, a number of countries such as Denmark and the Netherlands have shown that where economic policies have shifted incentives away from pollution and into sustainable industries, whole new growth sectors can be born that create employment and lead the world in sustainable technologies.

It is important not to gloss over the fact that the impact of ecological tax reform will be felt more strongly by some sectors than others.  The extraction of brown coal and its use in the generation of electricity, for example, would receive less favourable treatment under these reforms than it does at present.  Communities affected by changes to the cost structure of such forms of resource exploitation should be consulted to determine what support they require for adaptation to a sustainable economy.  Such consultations, whilst sympathetic and responsive the the legitimate concerns of the communities, should reflect the fact that adaptation will be required sooner or later and that it is therefore not an option, but a requirement.

Priorities and options

As discussed above, ecological tax reform can provide the funds for reducing the burden of other taxes on individuals and businesses.  The precise nature of these tax cuts are not addressed directly in this submission, however there may be any number of ways that tax cuts could be provided to ensure greater equity in the tax system and/or reduce the costs of certain taxes on business.

Before this inquiry could rise proudly to announce such tax cuts, however, there is a need to more fully explore the ecological tax reform options at our disposal.  Although Appendix A has illustrated some options, a more focussed inquiry should be established as a matter of priority to identify the range and financial magnitude of:

1.	Financial subsidies, incentives and concessions provided by all tiers of government to activities encompassing the use, depletion and degradation of our natural resources including soil, water, air and bio-diversity.

2.	Environmental subsidies to (that is externalities arising from) the activities listed in (1) above.

3.	Potential new taxes on the activities listed in (1) above with the dual purposes of influencing behaviour and recovering the full cost of environmental degradation.

4.	Transition measures to mitigate any short-term negative effects on vulnerable members of the community that may result from the implementation of measures proposed in (3) above.
•	For example, retraining and investment facilitation in the La Trobe Valley.

Based upon the outcome of such an inquiry, more accurate costings could be developed to shift a significant proportion of the tax burden away from the productive and environmentally benign activities of households and businesses and onto pollution and unsustainable resource use.

Although the author is mindful of the Committee's desire to focus the scope of the inquiry, he is more than happy to provide further information or discuss any of the issues raised within this submission.

Appendix A

Examples of tax reform measures that could be adopted:

•	Auctioned tradeable emissions permits for greenhouse gases
•	Water charges to reflect full cost of supply and environmental impacts
•	Landfill levies to reflect the full cost of management and environmental impacts for the full life of the landfill
•	Levies to enable incorporation of extended producer responsibility principles into product and packaging life cycle
•	Increased royalties on logging of non-plantation timber
•	Removal of tax deductibility for expenses incurred in inappropriate land clearing
•	Reflect impact on greenhouse gas emissions, water quality, salinity and bio-diversity
•	Elimination of stamp duty exemptions for off the plan homes, to be replaced with sliding scale of concessions for various energy and water efficiency ratings
•	Capital gains tax concessions for innovation in sustainable technologies
•	Accelerated depreciation rates for environmentally friendly plant and equipment
•	Allow tax deductions (and GST input credits) on expenses for environmental protection even when not directly for business purposes
•	Broadening the definitions in the Landcare and water conservation rules for upfront tax deductions to include protection of biodiversity and air and water quality
•	Tightening the scope of water conservation deductions to reduce incentive to overstock
•	Provide non-commercial loss concessions for environmentally friendly business activities (along the lines of the primary production test) reflecting long lead times that can exist in eco-businesses
•	Significantly higher registration charges for larger and/or less fuel efficient motor vehicles
•	Elimination of the incentive to drive company cars further to obtain more favourable rates under the FBT statutory method
•	Incorporation into FBT legislation of measures to encourage salary packaging of public transport fares such as an allowances for business use of public transport passes along the lines of the statutory percentage for motor cars

This is not an exhaustive list of potential measures.  

References

Australian Bureau of Agricultural & Resource Economics, Insights, 2003, Canberra

Australian Bureau of Statistics, Taxation Revenue, Australia, May 2003, downloaded from www.abs.gov.au

Australian Conservation Foundation, 2000, Environmental Tax Reform, ACF, Melbourne

Department of Environment, Sport and Territories, 1994, Subsidies to the use of Natural Resources, DEST, Canberra

Department of Environment, Sport and Territories, 1996, Environmental Economics Series: Taxation and the Environment, DEST, Canberra

Douglas, R. 2002, Potential Effects of Selected Taxation Provisions on the Environment, Report to the Productivity Commission

Smith, S. 2003, Environmental Taxes and Competitiveness: An Overview of Issues, Policy Options and Research Needs, OECD, Paris